The mass misunderstanding of the iPhone 5c market

In the past week there have been countless stories run about the alleged production cuts of the iPhone 5c. I say “alleged” because that’s all it is right now. Allegation. And at least one of the analysts (who I shall not name) making this allegation has a very spotty track record on all things Apple.

But let’s assume it’s true. It very well may be. Isn’t it still also true that the iPhone 5s sells for about $100 more than the 5c? And wouldn’t that make it a more profitable phone for Apple to sell? Of course it would. Rhetorical question.

Apple sold 9 million of its new iPhones in the first 3 days of launch in September. That’s a pretty big number, and if more of those were the 5s isn’t this actually a good thing?

Bottom line here: If the majority of your customers want to give you more money for a more expensive (and more profitable product), resulting in a production slowdown for your cheaper product, that’s what I call a high class problem. What's more, if Apple staged the iPhone 5s as the blockbuster fall release, and the iPhone 5c as the long-tail play that follows behind it, then it's an even higher class problem.

To illustrate how well Apple is doing, look at Verizon, who just released Q3 results this morning. Out of 7.6 million smartphone sales for the quarter, the iPhone accounted for 51% of them, which is up from 43% last quarter. Year over year Verizon’s iPhone sales are up 26%.

Apple may very well may have screwed up their pricing strategy. Perhaps there aren’t enough people willing to shell out a ton of cash for what is realistically a one-year old model repackaged in polycarbonate. Maybe Apple should have been more aggressive in hitting a lower price and capturing more market share. Maybe they should have made a netbook too. But when you look at the Verizon numbers (and more carriers are bound to report results over the next few weeks), that's a tough argument to make, at least right now.

Analysts and financial writers like to write shocking headlines. They pick one number, one metric, ignore complexity, ignore the big picture, and make the facts match their narrative. But while Apple has a simple product line, they certainly don't have a simple production line. They have multiple suppliers, and a complex array of moving parts. Calamitous headlines are easy. Doing real analysis on Apple is hard.

All that aside, when you peel the onion even one layer deep isn’t it obvious that, mathematically, given they still sold huge numbers on launch, that profitability is actually climbing?

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The mass misunderstanding of the iPhone 5c market

I actually like what Apple is doing with the Iphone 5C. They are keeping the 5S as a "premium" product with little or no discounting and allowing retailers to heavily discount the 5C on two year contract. Seems like a smart way to dip into the lower cost market without actually creating a less than fully capable phone. In the past they allowed discounting of last years model, which left bargain hunters with the stigma of buying "last years phone". By creating a "new" lower cost phone, the can eliminate that stigma. Well played.

Really well written article Chris. I have one point of clarity though.

"They pick one number, one metric, ignore complexity, ignore the big picture, and make the facts match their narrative."

^ This is what all pro-Apple pundits do, including iMore. Just look at the countless profit share articles [1 metric] or the usage share [1 metric] or top manufacturer numbers [1 metric]. Well, technically you could count iMore's articles but you get my point.

I always say: pick your metric and you too can be a winner. Analysts are doing the same: picking a metric. So you contend they are wrong for doing so while iMore does so.

Well, yes. But the anti-Apple pundits have perfected this into an art form. And I refer to Rob Enderle, Henry Blodget, Forbes, WSJ, et al. iMore and Rene Ritchie can't hold a candle to those guys. But then the stock price is over $500 again so the effects appear to minimal for now.

I'm not saying the 5C is bad, but people thought it would be a cheaper iPhone, not just the same phone as last year, just with a different body. If they kept the iPhone 5 and didn't make the 5C, they would've saved money from making a new product, and people wouldn't bash it in saying that the "cheap" iPhone isn't cheap. At least Apple is gaining money from the 5S though.

I disagree. Analysts assumed it would be a cheeper phone because thats what they wanted. Then reported it to everyone that way and set expectation.. Just because a small group makes an assumption, doesn't mean Apple MUST follow and fulfill that expectation.

Thats been a problem with Analysts for sometime.. Many companies end up chasing what they say should be done, then everyone expects it. A GREAT example is Samsung and the smart-watch.

When reality is they should be producing what their own research shows them what consumers will want and pay for. If Analysts ran these companies, it's likely most would be run into the ground.

Diagree! The 5C is, effectively, cheaper (by cheaper, meaning lower price). In the US, Wal Mart, Target, Best Buy, and Radio Shack are all selling it for $45-$50, or free with turn-in of old iPhone (Best Buy). We bought one, and frankly it is the best iPhone we have ever had. Which has only whet our whistle more for the 5C, but we are saving up for 2 of those in a couple of months. So I think that is what is going on here. I was always suspicious that these reports/analysts are jumping the gun on negative news. Just ask Microsoft, when you become Number 1, there are a LOT of people gunning for you. iOS and Android have supplanted Microsoft as the Number 1 OS in the world, by sheer device count, and as the mobile market is growing while the PC market is getting set to retract, Microsoft should be scared. And so, too, do others feel threatened when they don't like the #1's products, they look for tidbits to prove they are right. This is known in science as bias, and it is darned hard for Humans to be aware of our bias, and set it aside to be truly objective. So yes, most of the negative Apple news is negative "Apple-hater" bias, but like is pointed out above, much of the pro-Apple news is also "Apple-lover" bias. Reader beware.

analyst are their to profit off the stock. Stocks go up when earnings go up consistently. It's not an issue of analysts making assumptions. The analysts have analyzed what's growing and it's the low end market in china and india selling to people that are not wealthy. High end phones are not a growing area. So they made the educated guess that since Apple is having declining market share in many markets, Apple will, like android phone makers, attempt to look to get growth in from areas that are growing. The 5C clearly was not the answer because the price was too high. Simple as that. Analyst can look at the numbers and see that the people buy 5s's are not the new customers that would have bought the 5c but the same people that were already buying high end phones and thus they aren't attending to the segment of mobile phones that is growing the fastest. And they trade accordingly until Apple adjusts or releases some other product that makes up for the difference they'd have gotten if they'd released a phone that appeals to the poorer markets. The other fly in the ointment is a potential china mobile deal which would ad 10s of millions of customers for the higher end 5s despite not having an affordable phone. A china mobile deal would very much offset disappointment with not addressing the cheaper phone market. That however doesn't negate the fact that that market is their to be won in growing countries and companies like ZTE are snatching it up and Apple is ignoring it. apple lovers get all bent out of shape about analysts but analysts, one don't care, and two are simply looking at what area's show growth and what doesn't. For example it's the exact same thing they did with companies like HP when they looked at their financials and said, "Whoa, printer sales are flat, ink sales are flat, desktop sales are declining, laptop sales are flat. If you want the stock to go up you better find new sources of profit because printers aren't coming back and in a recession desktop and laptop spending may be depressed." People think analysts are about hating apple. In reality they are simply making guesses about markets. They can VERY much be wrong. I'm not claiming they are right but it's not about bias or anything.

I agree in a way. The whole "apple is going to make a cheap iPhone" really has kind of damaged the phones reputation. For example, my wife always gets the last years model (4 when the 4s came out, 4s when the 5 came out, etc). So when the new iPhone 5s and 5c got announced I (like always) talked about getting the new one. She asked when she was going to get the iPhone 5 (I was proud because I usually have to almost make her upgrade as she simply doesn't care). I asked her, "don't you want the iPhone 5c?" She responded, "No! Why would I want the iPhone cheap!" I ended up gettin her the 5 before it sold out (which it seemed like everyone did as I've never seen the last yeArs phone sell out before the release of the new model, but at work everyone snatched up the 5 when they could. Like everyone I wanted to get my hands on the 5c (and 5s as mine was on back order) so I took a trip to the apple store the Saturday after the release and took my wife with me (her iPhone 5 was set to come on Monday and I wanted to see if she wanted the 5 instead as they are the same price and really wanted her to get the 5c). I was pleasantly surprised by the 5c and I actually for a brief second could see myself using it. The colors looked great and it felt even more high quality than Nokia phone s which I've been a giant fan of. My wife still didn't want the phone. She couldn't shake the whole "cheap iPhone". It really surprised me. My wife has never cared (well she hated the Samsung android phone I got her awhile back so yes, she has cared, but as long as she had an iPhone she was good).

The other day an iPhone 5c commercial came on and her mother and step dad was over and her mom asked why apple is not pressing the new high end iPhone and they both said, "why would anyone want a the cheap iPhone?" This is just a very small example and I'm sure many people love their iPhone 5c (I know I really like it), but even people that don't care much about the latest and greatest see this phone as a cheap phone that is still kind of expensive. The media and rumors have damaged this device. I do think apple will recover and sales will be excellent as people pick them up as they will change their mind, but this is the first thing I thought about when hearing the rumor apple has cut production (for the second time) on the iPhone 5c. I still wonder why apple didn't call it the iPhone color instead of 5c and like I've shown some think it stands for cheap and no one wants to pay $99 and two years of their mobile life on a cheap phone even if this cheaper iPhone is of better quality than 95% of the devices out there. Apple has an up hill battle and needs to attack this head on.

And why did people think it would be a cheaper iPhone? Did Apple say it would be a cheaper iPhone? Nope, the analysts and their jerktastic punditry WANTED it to be a cheaper iPhone and when it wasn't they called it a failure. If you dare to contradict an analyst you are in for some hard times as they don't like being wrong.

The problem with the 5c is as far as tech sites are concerned is that it's not what they thought it would be. That's the problem with fishing for leaks and believing in them for too long.
The funny thing is, is that no one looks at the business strategy. If you release a phone that looks the same as your last phone it gets harder to sell the new one. Especially now with there not being that big of a difference between the 5 and 5s. Then you throw in that it's easier and cheaper to do the 5c than the 5 it's a win win for apple. The 5s is hard to find so imagine if apple had to make more to cover the 5. Those are huge constraints in the supply chain and people would really be losing it.

The interesting thing will be what Apple does with the iPhone "C" line next year.
Do they simply wrap the 5S internals in a plastic case?
Or do they reserve Touch ID for the flagship "6" and force "C" users to type pass codes?

I think Apple would get tons of (justified) criticism if they do the latter.
Touch ID is a great feature, and it may be a key factor in sales of the 5S.
It's a powerful up-sell, but I think Apple needs to put Touch ID in the "C" next year.
We'll see about a year from now.

I think the big selling feature between the 6 and 6c (or whatever they will be called) will be size. I'm hoping that apple will make the C bigger and keep a 4-4.3 inch be the flagship. I don't want a huge phone and I love the size of my iPhone 5 and 5s. I've owned numerous larger android phones and I don't care for them. Who knows maybe that wil change because I love apple hardware. I just don't understand the market. Apple sells 9 million 4 inch 5c and 5s', but still all you hear from everyone is that apple won't make a bigger phone. Unless apple will come up with something with apps to take advantage of the larger displays (some Apps between iPad and iPhone would be great) as simply running apps designed for. Smaller display blown up bigger makes no sense to me. I don't understand note users (my two friends love theirs and think my iPhone looks small and silly, but to me having a giant phone running phone apps looks silly. The same friends (and market it seems) want huge phones and at the same time want smaller tablets (both have a nexus 7 they swear by). I just don't understand why they want an almost 6" phone and a 7" tablet. I love my 4 inch iPhone and 8" iPad mini.

Personally, I'd rather have the plastic one. Then again, I'm not a huge fan of aluminum. My 5S feels like it might break if I drop it. My plastic Galaxy Nexus feels like it would just bounce once, and come out unscathed :)

What i think the Apple lovers/defenders (not that i'm anti apple i love apple products) don't get is the 5C was not a "mass market solution" it was just the same as teh 4s was to the 5. All it was was a change in packaging. But what analysts see is that in that decision, the one to NOT make a truly low cost phone, that appeals to less wealthy buyers in less wealthy countries, is that they think Apple "doesn't get it". That they don't fully understand where the market is headed. Like Black Berry didn't get where it was headed. Like how Apple didn't really get where the PC market was headed and lost all that share to microsoft. Who is right? I don't know. Markets change. It was all about netbooks until tablets came out and ultraportable laptops kind killed them. It was all about 3D until sanity prevailed and after like 3 years they found out most people don't care about 3D. Blu-ray and HD-DVD was everything until people began to realize that digital delivery systems like Netflix, On-Demand, may be the real future of HD-movies. Time will tell. The thing is though, like Microsoft, Apple has enough cash to have more than one major flop and not be "done for." So all that this is the downfall of Apple is likely premature. But i could imagine a world where Samsung makes one killer phone that takes the world buy storm and completely flips the script. I doubt they will but where something like that to happen and iphones stopped being the coolest, the standard bearer well then Apple may have issues because that's brand damage and a poorly selling 5c is not brand damage. Especially when people will still buy 5s's and 6s and 7s

But if were talking metrics, wouldn't it be more important to know the number of new users buying 5S versus upgrading users? Its money either way, but I would think the more important metric would be converting new users.

And from that point, the 5C (formerly just last year model) was an entry point for new customers. And the year before last was just for the cheap ones who wanted any type of iPhone.

Now with that all in play, the metric I think the 5C should be measured against is how many new customers did it bring in? A lot of analyst felt that's what the 5C was for. A lot of consumers will see a plastic phone next to an aluminum phone and think it should be cheaper. I think, overall, that's what all these "naysayers" are thinking.

Now, I'm not saying I agree with this, just throwing another way to take a look at it. And on that note, do we ever really get the new customer numbers vs upgrade numbers?

The trouble with analysts is the first four letters of the word analyst. They tend to be that way about small amounts of information and can't focus on the big picture.

Anyone that thinks that the iPhone 5C should sell any better than the iPhone 4S did in the previous year have not grasped that while the phone may be a new phone it is merely a reinterpretation of the older iPhone 5. It has become a replacement for the iPhone 5 in what would have been its role as the old discounted model just like the 4S took that role when the iPhone 5 was launched.

That market is still going to be limited to those that doesn't want the latest and greatest and are willing to settle for last years model!

What Apple have done was smart. One of the stories that surfaced after the launch of the iPhone 5 was that the manufacturer of the anodized body of the phone struggled to meet quality with the slate color and that a huge chunk of them were rejected. By replacing the body with a polycarbonate body, even though it meant a redesign of the phone in total, it meant that the supplier of the anodized body's could discontinue production of the slate color and with less rejects they could comfortably meet demand for the space grey, gold and white colors. Making last year's phone into this year's discount phone and giving a new color range it gave it a new appeal. It reduced the build cost.

I've said before, reducing the order is a normal adjustment when there are color variations to a product. You don't keep production up for those colors that they find are not selling as well. That is bad business, having a high holding of inventory that is not moving is a loss and reducing the total order is a reflection that Apple is tweaking the order to cater for the 'demand' of those colors that people are loving and increasing those while lowering orders for those that people have found less desirable.

If I had to replace by iPhone 5 and didn't want extra features I would happily purchase the 5C. Shame they don't do it in black.

Thanks for the article!! I'm kinda sick of reading all the articles saying the 5C wasn't cheap enough and that's why it's not selling. The fact is that the 5C was never supposed to be a "cheap" phone. It was supposed to be exactly what apple does every year. New phone comes out and they drop the previous year's model down to $99 on contract. Which they did here with the 5c only they added colors to it. No where did apple change their normal cycle. I'm sure the previous model always cuts production after the new phone comes out, no?

I think that selling the 5C makes more profit for Apple than selling the 5S. You have to consider the cost of production in order to calculate the profits. It seems to me that it costs more than just an extra 100 bucks to go from 5C to 5S, giving the plastic casing, internal components etc. I'm not saying the 5S price is low; I'm saying that the profits on the 5C are outrageous. Costs 60% less to produce and sells for only 20% cheaper than the 5S.

No matter how many stories claim the 5C "failed" or was a "flop" facts are it had more preorders than the iPhone 5 last year... and sold what? 3 million units over launch weekend? That's more iPhone 5Cs in three days, than BB10 units Blackberry shipped all quarter in Q2.

It's not and it's not even close. Take an average of 4 of 5 different tear down sites that show total cost of components and you will see the range of difference between the 5c and the 5s is tops around $20 and most say it is probably less than they are estimating. Yes you have r&d that goes into it but don't forget this is the identical form factor to the 5 so no increase in costs there. They essentially are paying for the difference in the new processors, camera/flash, battery and touch sensor. That's it. The rest of the components they can reuse from the 5. So whatever r&d they spent on the new components of the 5s it surely will be more than paid off in just the initial sales of the 5s. Apple is making at least $80 more in bottom line profit over the 5c, so based on those opening weekend projection enticing people to buy a lot more 5s just seems like smart business. I think we can safely say this is why the 5c has plastic back versus aluminum on the 5. The cost difference between those 2 backs is on the high side of estimates is around $2 however it is pretty obvious a lot of people are going for the 5s as they don't view the plastic as a premium product. I'm sure that is why apple discontinued the 5 rather than dropping the price on it, if the 5 were available I think it safe to say a lot of people may buy a 5 for half the price if they don't care about the minor camera improvements or touch id.

People can hate apple all they want but they definitely know what they are doing when it comes to driving profit.

Yes. I think the same thing. I was gonna let it go but you pointed it out. Additionally, it's a lazy assumption that mere higher costs means higher profit per product. There are countless areas where that is not the case from cars to restaurants to beverages etc.

I think the 5c is a good way for someone to get into the Apple/iPhone experience for the first time without spending the cash for the "flagship model". They may come to like it and stick with it. Some people don't want or need the latest and greatest phone.

My view is, if they can sell more of them than they would've sold of the iPhone 5 as it's 'cheaper' model, then the 5C is doing it's job and is sufficiently different from the 5S as to not effect its sales significantly.

I think this article is a knee-jerk reaction to the news that the 5c is not performing well, when everybody at iMore was so sure it would be wildly successful. Now stockholder Chris tries to convince us that a failing 5c is the best thing that could happen to Apple.

Perhaps Apple should launch a paper iPhone running Android so it could fail ever harder and be even better for Apple stock.

I agree he threw in the wrong reasoning but I wouldn't be surprised if the 5S is the more profitable of the two. The thing is, we don't know. Someone above mentioned R&D, but trust me, the 5C has its share.

Still, people don't seem focused on the real factors. Will margin take much of a hit? Will Apple increase sales from last year? That's the goal.

We're just a mere 11 months away from the next "bigger" iphone. The short term thinkers need to think what makes sense later. Not what is happening now. Apple is playing chess while people are analyzing (criticizing) what they think is a checkers game.

When a company gets to the position where Apple is, margin and sales are not the only real factors, not even the most important. Equally important are mindshare and image, because those drive margins and sales. A failing product hurts Apple's image and that is what is being dowplayed in the article.

And once you lose the image of industry leader with great products, as happened to Microsoft a few years back, its very hard to get it back, even with good products.

Why are there so many articles trying to defend the 5c? Wether it was meant to be a cheap iPhone or wether it was meant to fill some other niche is irrelevant. What matters is how the product effects Apple's bottom line. If it sells well, it was a successful product. If not, it wasn't a successful product. The 5c may be a wonderful phone.. Maybe just not the preferred phone, especially at that price point. Guess we will know for sure after the holiday season.

Also, Why is it assumed that the 5s is more profitable per unit sold than the 5c simply because it is sold for $100 more? I would hope that Apple is saving money on the material cost producing the 5c... or else, what the hell was the point? Options? cus, that doesn't sound like Apple.

Chris is the same guy who in the summer wrote that Nokia and Blackberry are rather similar kind of companies. I guess they have rather similar structure, business areas, size, ... or wait. No. I guess trying to argue with someone with that level of knowledge of the field is like trying to debate science with a Creationist. So let us not take his Apple analyses too seriously.

I think you're missing the point. Lots of people expected a CHEAP iPhone. The 5C simply takes the place that would have been occupied by the discounted iPhone 5 and the older iPhone 4S. So Apple's pricing strategy didn't change, from what I can tell.

And there seems to be no reason for it to do so, at least at this point. Although Apple doesn't break out separate model unit sales, most estimates and some general statements by Apple executives indicate that over the past 12 months sales of the iPhone 4 and 4S were extremely healthy -- millions of people were happily buying 1- and 2-year Apple phones instead of brand new, and cheaper, Android phones.

I'll be curious to see how the prorated monthly payment plans affect iPhone sales overall: if you're comfortable with the 2-year payment commitment, you're starting price for a new iPhone 5S is about $27 under the Verizon Edge program: no down-payment, no upgrade fees, and no two-year service contract.

The issue of how profitable the iPhone 5C compared to what the discounted iPhone 5 would have been is unclear: we don't have enough data to know.

Finally, there's simply no real evidence of what actually is happening in Apple's supply chain with regard to the 5C; nor if anything IS happening, why it is.

Here's the rub. if the 5c came in black and 64gbs i buy it over a 5s almost any day cause i don't think the 5s is $100 better. But pastel colors and small storage make it a non-starter for me. but i held it. I think it's a well made phone, just not for me.

I see that there was no mention of China here. I think that the reports of the cut in production of the 5c originated on rumours of poor sales in China.
There are many competing phone makers there and the quality of the products is getting better all the time. One company Xiaomi, has just launched a phone with a 5" 1080p screen, a 1.9GHz processor (2.3 GHz for export models) and other specs that totally crush the iPhone 5c, yet this phone is $200 less than the 5c. It even looks better than the 5c.
I predict that the Chinese will come to dominate the market with high spec phones that are much cheaper than the current offerings. This causes a problem for Apple, who have the dominant selection of apps. I'm in the UK and we subscribe to Virgin Media for cable tv and broadband. They have a remote service called TV Anywhere, which can only be accessed by mobile devices made by Apple. You all know that this is not unique and that Apple devices are the most expensive on the market.
I often read here that Apple is a premium brand, one poster compared Apple to Gucci. You should not need to buy a Gucci handbag to access mainstream services. Also, looking at the Verizon figures, is an iPhone really a premium product, like a Gucci handbag, when every other person with a smartphone has one?
Apple and the other phone makers will need to start making genuinely cheaper phones or licensing others to make them running iOS, there are plenty of capable companies in China.
I'm always puzzled at the need to defend Apple's profitability here, when Apple is already the second most profitable company on earth.